Question by ScubaS: What happens to a Roth IRA when you make too much money?
I understand the difference between a Roth and Traditional IRA, but I haven’t found any information on this technicality.

Let’s say I open a Roth IRA because I don’t have enough income to make me exempt. Then I start making more money and open a Traditional IRA. What happens to the money in the Roth IRA? Can I keep investing with it capital gains tax free, or does it roll into the Trad IRA? What are the tax consequences?

Thanks for your help.

Best answer:

Answer by v bNothingyou say makes any sense.

If you have less than $ 5000 of income, yeah, it would better to put the income into a Roth than a traditional IRA because a deduction would be worthless to you.

If in a following year you have, say, $ 20,000 of income, then yes you can ALSO open a tradtional IRA, put the money in there and take a deduction.

The issue is that you have 2 accounts. The $ 5000 you put in can go into 1, the other, or any combination as long as the total is not more than $ 5000.

The Roth continues, you hope to grow. (By the way, IRAs of all flavors do not have ‘captial gains’–if they are taxed, it’s ordinary.)

What do you think? Answer below!

3 comments so far...

src50 Said on March 13th, 2011 at 7:11 pm:

Nothing happens to the existing Roth. It just affects your eligibility to make additional contributions.

Financial JUSTICE Said on March 13th, 2011 at 8:05 pm:

Basically, you won’t be able to contribute to a Roth IRA if you earning a high income (somewhere above $ 114,000 if single) or $ 166,000 if married filing jointly), but you can still keep it and let it grow tax-deferred. In 2010, the tax law changes where any working citizen can open it, no matter how much income you make.

If your income is above those limits I mentioned, you can open a Traditional IRA. After 2010, roll the Traditional IRA into a Roth IRA.

I think the answer is that you can keep the Roth from prior years (when you were not over the limit) and whatever had been earned by those funds, but would have to roll over the contributions from the year in which you went over the limit. (And you’ve have to do it soon enough to avoid a penalty.)